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Financial Ratio Analysis from Annual Report-2007 of Indian Tobacco Company.

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Submitted to:

Mrs. S.Sudha

Faculty of Financial Management, Indian Institute of

Plantation Management, Bangalore

Presented By:

Prit Ranjan Jha

1

2

3

Notes

• All amounts worked here are in terms of

Rupees in Crores (1 crore

=10000000=10^7).

• MS Excel sheet has been used for

computing the ratios.

4

I Liquidity Ratios

Year 2007

1 Current ratio: Current assets / Current Liabilities

II.3:Current assets,Loans and advances 6289.72

II.4:Current liabilities and provisions 3857.59

(II.3/II.4) 1.630479133

The current ratio of 1.63 times says that the company is in

relatively good short-term financial standings.

term debt obligations; the higher the ratio, the more liquid the

company is.

5

I Liquidity Ratios

Year 2007

2 Quick ratio or Acid test ratio: (Current assets-

inventories)/ Current Liabilities

II.3:(Current assets,Loans and advances) 6289.72

Less:II.3a:Inventories 3354.03

2935.69

II.4:Current liabilities and provisions 3857.59

(II.3-II.3a)/(II.4) 0.761016593

The small ‘Quick ratio’, i.e. 0.76 times says that the company's

financial strength is not so strong. In general, a quick ratio of 1

or more is accepted by most creditors; however, quick ratios

vary greatly from industry to industry and ITC does not have as

such any worries in getting creditors.

ITC has strong financial positions in many other aspects.

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I Liquidity Ratios

Year 2007

3 Cash ratio or Absolute liquidity ratio: (Cash

+Marketable securities)/Current liabilities

II.3c:Cash and bank Balances 900.16

Add:Marketable securites 0

900.16

II.4:Current liabilities and provisions 3857.59

(II.3c)/(II.4) 0.233347764

The cash ratio of 0.23 times says that the company is

not in the position to very quickly liquidate its assets and

cover short-term liabilities. But there is no such liquidity

need for the company and so the small value of the ratio

has no such important implications. (The ratio is of

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interest to short-term creditors)

II Solvency Ratios

Year 2007

1 Debt – equity ratio: Long term debt/ equity (net

worth)

I.2:Loan funds 200.88

I.1:Shareholders funds 10437.08

(I.2)/(I.1) 0.019246763

company has not been aggressive in financing its

growth with debt. Thus its earnings are stable. The

company has better support from the shareholders.

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II Solvency Ratios

Year 2007

2 Debt ratio: debt (long term)/ (debt (long term) +

equity) or debt/capital employed

I.2:Loan funds 200.88

I.1:Shareholders funds 10437.08

(I.2)+(I.1) 10637.96

(I.2)/(I.2+I.1) 0.01888332

The ratio of 0.02 times signifies that the company

has employed more capitals over its debts. Thus the

company is efficiently utilizing its loan funds.

9

II Solvency Ratios

Year 2007

3 Interest Coverage ratio : (earnings before interest

and tax) / Interest

P/L:III:profit before taxation and exceptional items3926.7

II.4a-13:Interest accrued but not due on loans 0.55

(P.III)/(II.4a-13) 7139.454545

The ratio of 7139.4 times is magnificently very high

and hence the company has very sound financial

position. It has no tension of paying interests over its

loans.

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III Turnover Ratios

Year 2007

1 Inventory turnover: Cost of goods sold or net

sales/Average (or closing) inventory.

II.3a:Inventories 3354.03

(P/L:IB)/(II.3a:) 2.127515258

The ratio of 2.13 times signifies that the company is

efficient in selling its stocks.

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III Turnover Ratios

Year 2007

2 Days of Inventory holding: Number of days in the

year (say 360)/ Inventory turnover ratio.

Number of days in a year 360

Inventories turnover ratios 2.127

(360)/(ITR) 169.2524683

169 days or about five and half months periods for

the liquidation of stocks is quiet efficient.

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III Turnover Ratios

Year 2007

3 Debtors turnover ratio: Credit sales or net sales/

Average (or closing) debtors (or accounts

receivable (total debtors +bills receivable)

II.3b:Sundry debtors 636.69

(P/L:IB)/(II.3b) 11.20757354

The ratio of 11.2 times signifies that the company

is getting good returns and has no visible risk but

benefits out of its debtors.

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III Turnover Ratios

Year 2007

4 Collection period: Number of days in the year

(say 360)/ Debtors turnover

Number of days in the year 360

Debtors turnover 11.207

(360)/(DTR) 32.12278041

The debt collection period of 32 days is quiet good

and the company is efficient in getting back its dues.

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III Turnover Ratios

Year 2007

5 Current assets turnover: Net sales/ Current assets

II.3: Current assets,loans and advances 6289.72

(P/L:IB)/(II.3) 1.134509962

The ratio of 1.13 times signifies that , in spite of the

current liabilities, the company is efficient in making

sales revenue.

15

III Turnover Ratios

Year 2007

6 Net current assets turnover: Net sales/ Net current

assets

P/L:IB:Net sales 7135.75

Net Current Assets 2432.13

(P/L:IB)/(NCA) 2.933950899

highly efficient in utilizing its net current assets and

generating sales revenue.

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III Turnover Ratios

Year 2007

7 Fixed assets turnover: Net sales/ Net fixed assets

P/L:IB:Net sales 7135.75

II.1:Net Fixed Assets 5610.91

(P/L:IB)/(II.1) 1.271763404

very efficiently utilizing its fixed assets for generating

sales revenue.

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III Turnover Ratios

Year 2007

8 Net assets turnover: Net sales/ Net assets or

capital employed : (Net assets = all assets –

accumulated depreciation)

P/L:IB:Net sales 7135.75

II.1:Net Fixed Assets 5610.91

II.2: Investments 3067.77

Net Current assets 2432.13

Net assets 11110.81

(P/L:IB)/(NA) 0.642234905

The ratio of 0.64 times signifies that the company has still to

be more efficient in utilizing its net assets in generating sales

revenue.

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IV Profitability Ratios

Year 2007

1 Margin: (Profit before interest and tax (PBIT)/ Net

sales)×100

P/L:III:Profit before taxation and Exceptional items 3926.7

P/L:IB:Net Sales 7135.75

(P/L:III)/(P/L:IB)×100 55.02855341

the company is making good profits.

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IV Profitability Ratios

Year 2007

2 Net margin: Profit after tax (PAT) ×100 / Net sales

P/L:IB:Net Sales 7135.75

(P/L:III)/(P/L:IB)×100 37.83722804

The net margin of 37.83% is quiet impressive, and the

company is performing well.

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IV Profitability Ratios

Year 2007

3 Before tax return on investment: (PBIT/Net

assets) ×100

P/L:III:Profit before taxation and Exceptional items 3926.7

II.1:Net Fixed Assets 5610.91

II.2:Investments 3067.77

Net Current assets 2432.13

Net assets 11110.81

(P/L:III)/(NA)×100 35.34125775

performing well.

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IV Profitability Ratios

Year 2007

4 Return on equity: (PAT/Equity (net worth)) ×100

P/L:III:Profit after taxation 2699.97

I.1:Shareholders funds 10437.08

(P/L:III)/(P/L:IB)×100 25.869017

is utilizing the shareholders funds in a better way.

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V Equity-related Ratios

Year 2007

1 Earning per share (EPS): PAT/Number of

ordinary shares

P/L:III:Profit after taxation 2699.97

P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907

(P/L:III)/(P/L:IV)(×10^7: to convert in per rupee) 7.185287102

of Rs.7.18 is very good.

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V Equity-related Ratios

Year 2007

2 Dividends per share (DPS): Dividends/ Number of

ordinary shares

P/L:IV:Proposed Dividend 1166.29

P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907

(P/L:III)/(P/L:IV)×10^7(to convert into unit ruppes) 3.10378578

Dividend per share (DPS) is a simple and intuitive

number. It is the amount of the dividend that

shareholders have (or will) receive, over an year, for

each share they own.

In compared to the face value of the shares, i.e.

Re.1.00/share. DPS of Rs.3.10 is quiet good.

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V Equity-related Ratios

Year 2007

3 Pay out ratios: DPS/EPS or Dividends/PAT

DPS 3.1

EPS 7.19

(DPS)/(EPS) 0.431154381

a very low payout ratio indicates that a company is

primarily focused on retaining its earnings rather

than paying out dividends.

The payout ratio also indicates how well earnings

support the dividend payments: the lower the ratio, the

more secure the dividend because smaller dividends are

easier to pay out than larger dividends.

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So the value of 0.43 times is quiet good.

V Equity-related Ratios

Year 2007

4 Dividend Yield: DPS/Market value per share

period .

The closing price of the common or preferred stock as

reported on the applicable stock exchange consolidated

tape as of the date indicated

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V Equity-related Ratios

Year 2007

5 Price/Earning ratio: Market value per share/ EPS

period .

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V Equity-related Ratios

Year 2007

6 Earning Yield: EPS/ Market value per share

period .

28

V Equity-related Ratios

Year 2007

7 Book value per share: Net worth/ Number of

ordinary shares

I.1:Shareholders funds 10437.08

P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907

(I.1)/(P/L:IV)×10^7(to convert into unit ruppes) 27.77564799

BV is considered to be the accounting value of each

share, drastically different than what the market is

valuing the stock at. The book value, i.e. Rs.27.77 is far

higher than the face value of each share, i.e. Re.1.00.

“Here “diluted” value in considering numbers of shares is

not considered.”

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VI Investment-related Ratios

Year 2007

1 Return on assets or earning power (ROA): (PAT/ Average

total assets (of the given years, here 2006&07)) ×100 or

((PAT+ Interest)/Average fixed assets) ×100

P/L:III:Profit after taxation 2699.97

Fixed assets 2007 5610.91

Investments 2007 3067.77

Current assets 2007 6289.72

Fixed assets 2006 4405.13

Investments 2006 3517.01

Current assets 2006 5161.9

Average total assets 14026.22

(PAT/ATA)×100 19.24944853

Earning power of the company, i.e. 19.25% is quiet good and the

company is doing well.

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VI Investment-related Ratios

Year 2007

2 Return on capital employed (ROCE):

(EBIT(PBIT)/ Capital employed) ×100

P/L:III:Profit before taxation and Exceptional items 3926.7

I:Sources of Funds 11110.81

((P/L:III)/I)×100 35.34125775

The ROCE of 35.34% signifies that the company is

getting good return out of its investment decisions.

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VII Return on Equity (ROE)

Year 2007

1 ROTSE (return on total shareholders equity):

(PAT/ Total shareholders equity) ×100

P/L:III:Profit after taxation 2699.97

I.1:Shareholders funds 10437.08

(P/L:III)/(P/L:IB)×100 25.869017

The ratio (25.87 times) is same as that of “Return on

equity”, since there are no preference shares.

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VII Return on Equity (ROE)

Year 2007

2 ROOSE (return on ordinary shareholders equity) /

RONW (return on net worth): ((PAT-preferential

dividends)/Net worth) ×100

P/L:III:Profit after taxation 2699.97

I.1:Shareholders funds 10437.08

(P/L:III)/(P/L:IB)×100 25.869017

The ratio (25.87 times) is same as that of “Return on

equity”, and “return on total shareholders equity” since

there are no preference shares.

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Du Pont Analysis

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Du Pont analysis for year 2007:

35

Du Pont analysis for year 2006

36

Du Pont analysis for year 2005:

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Du Pont analysis for year 2004:

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Du Pont Analysis

30.00 28.55

Return on total assets (%)

20.00

15.00

10.00

5.00

0.00

1 2 3 4

Years:1~2004:2~2005:3~2006:4~2007

Du Pont chart portrays the earning power of a firm. The ROA ratio is a central

measure of the overall profitability and operational efficiency of a firm it shows the

interaction of Profitability and activity Ratios, It implies that the performance of a firm

can be improved either by generating more sales volume per rupee of investment or

by increasing the profit margin per rupee of sales.

So as per the analysis, the company has to maintain more consistent and increasing

39

trend in its ROA in the following years.

References

• Class notes of Sudha madam, books from

the liabrary of IIPM.

• http://

www.investopedia.com/terms/d/debtequityratio

• http://

www.icmrindia.org/casestudies/icmr_case_stu

• http://www.econ.uconn.edu/

• http://www.morningstar.com

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